VAT to affect credit sales: expert

Manama : The implementation of Value-added Tax (VAT) will negatively impact the cash flow of companies providing generous credit terms to customers, warned an expert.

“VAT once enforced, will have immediate ‘cash-flow implications’ on the companies offering huge credit sales, forcing them to make further adjustments in their contracts,” said TP Anand, Senior Consultant at RSM

According to him, VAT will force the companies to pay their taxes, regardless of their terms of sales, “as it is being charged on the invoice”.

“So the practice of giving 90 days credit or 120 days credit or even longer can get a bit more complicated,” he told DT News. He also warned that the companies might ask to increase the advance payment or will try to renegotiate the contract to “find an alternative, when offering credit”.

Explaining further, he said that the companies may grant credit, “but they will have to remit the 5 per cent tax, irrespective of whether the dues are collected or not”.

‘Insert VAT clause’

Stressing on the need to insert VAT clause in contracts, Anand said, “Long-term contracts which do not include clauses for VAT payment will create trouble.”

“So when VAT is introduced, companies will have to bear the cost,” he said adding: “Customers can argue that VAT is not included in their contract.”

“This will bring more trouble,” he said: “Especially if the company’s profits are at a 7pc margin and you have to pay a 5pc tax.”

“A solution is adding a clause mentioning that the customer will have to pay the VAT once it is implemented in the country,” he pointed out.

“The sales team will have to be trained on VAT and they should always be mentioning VAT in any contract they offer,” he stressed.